Click here to read the entire commentary.]
Last week the House Budget Committee, chaired by Congressman Paul Ryan (R, WI) issued a Budget Resolution for fiscal year 2012 along with a Republican blueprint for addressing the nation’s long-term fiscal imbalance. The “Ryan plan” would squeeze discretionary spending and health care entitlements very hard, lower marginal tax rates, and expand the tax base.
- We agree that addressing the nation’s long-term federal fiscal imbalance is critically important, and that doing so might head off an eventual fiscal crisis that could threaten our standard of living over the long haul.
- The Committee’s report included a simulation analysis showing the economy strengthening immediately as a result of the fiscal contraction; that is, a negative short-run fiscal multiplier.
We don’t believe this finding, which was generated by manipulating an econometric model that would not otherwise have produced the result. - That analysis implied other questionable results — some of them probably unintended — including over $1 trillion of net new borrowing from abroad over the coming decade and the construction of several million unoccupied houses.
- We consider the analysis both flawed and contrived, and are concerned it will create the false impression among some legislators that implementation of the Budget Resolution would entail no short-run macroeconomic pain.
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